The Oil Chatter

The Oil Chatter

``Crude oil, once seen as a wealth-creating blessing for mankind, is fast turning into the devil’s tears.” Lutz Kleveman, The New Great Game: Blood and Oil in Central Asia

In view of the prevailing apprehensions about the rapidly rising energy prices, your prudent investor analyst wants to clarify that today’s situation is dissonant from the previous oil spikes such that today’s rise is largely due to ‘demand driven’ rather than supply ‘political’ shocks that had occurred in the past, of course this aside from the ‘supply inelasticity’ factor-not enough supplies to meet demand, where shortage is likely to persist due to the time lag to increase supply. It means that growing prosperity in emerging market economies have largely fueled today’s energy spike!

The pictures and excerpts below from gatewaypundit blog, exemplifies the current oil ‘demand-driven’ dynamics…

``Cars line up to buy petrol at a petrol station in Dongguan, south China's Guangdong province, August 17, 2005. China's southern manufacturing heartland of Guangdong is plagued by closed service stations, fuel rationing and hours-long gas queues. (China Daily)”

``Closed service stations, fuel rationing and hours-long gas queues plaguing China's southern manufacturing heartland of Guangdong are piling pressure on the country's oil majors to boost supply into the loss-making market. (Reuters)”

Again as I have highlighted last week, this is simply part of the unfolding commodity cycle. Yet, as for concerns regarding the ‘peak oil theory’, let me reiterate that the theory suggest that while the conventional or cheaply extracted global oil supplies maybe peaking, there are abundant energy alternatives that can to be accessed PROVIDED the viable price levels.

``We have oil for at least 40 years at present consumption, at least 60 years’ worth of gas, and 230 years’ worth of coal. At $40 a barrel… shale oil can supply oil for the next 250 years at current consumption… All in all, there is oil enough to cover our total energy consumption for the next 5,000 years. There is uranium for the next 14,000 years.” writes, Bjørn Lomborg in The Skeptical Environmentalist.

Let me quote another favorite analyst of mine, Mr. Martin Spring who did a fantastic write up on global energy investments, ``Business Week reported recently how higher energy prices make various non-traditional sources of energy commercially viable, giving these examples:

• Mining the oil sands of Canada and Venezuela is profitable at $25-30 a barrel;
• Oil-from-coal (as produced in South Africa for many years) and making alcohol fuel from sugar (already a big business in Brazil) are profitable processes with oil at $35-40 a barrel;
• Oil from America’s huge shale deposits becomes viable at $40 a barrel and higher.
• New nuclear power stations are already viable in the US, without any subsidies, at only two-thirds the level of current electricity prices.
• Another source suggests that the huge gas-to-liquid plants being built in Qatar to convert natural gas into diesel fuel will be profitable at oil prices above $14 a barrel.
  

This means that at current levels, high cost energy alternatives becomes a feasible option, albeit it will take years(!) to put current investments in these projects on stream.

In the meantime, what we have to worry about is the TRANSPARENCY of OPEC member countries about their ACTUAL PROVEN RESERVES considering that quotas have been issued based on these, from which member countries are thought to have padded up on its reserves to increase quota output allocations. Saudi Arabia for example, according to Matthew Simmons, CEO of Simmons & Company International, a Houston investment bank specializing in energy issues claims that ARAMCO’s last field by-field proven reserves estimates for Ghawar, the largest of the kingdom’s oil field, was made in 1975!

This makes world supplies on ‘razor-thin’ margins vulnerable to supply disruptions arising from simply just any incidents such as typhoons/hurricanes to terrorist strikes to geopolitical bedlams to oil platform fires, etc…

In other words, a meltup ‘shock’ is a bigger probability compared to a meltdown of oil prices due to the structural changes in the global oil dynamics. However we have to keep in mind of the fundamental premises; rising oil prices are part of the unraveling commodity cycle, cheap oil days are gone, the world is not running out of energy alternatives and that demand supply factors or oil/energy economics are the primary determinant of oil or energy prices today.

``Truth, when not sought after, rarely comes to light." - Oliver Wendell Holmes American Physician, Poet and Humorist. 1809-1894

US Dollar and Not Oil is the Culprit!

The weakness of the Phisix is definitely NOT correlated to OIL prices for the time being! As in the chart above, Oil prices have weakened (red line) coincidental to the sagging Phisix. Meanwhile, the latest inflection top of the Phisix coincides with the inflection bottom of the US dollar (green line). So for analysts mouthing that the lethargy of the Phisix is oil related is definitely spouting bunkums.

Soaring Oil Prices Underscore Upturn In Commodity Cycle

Soaring Oil Prices Underscore Upturn In Commodity Cycle

Headlines today bannered that crude oil prices soared to record levels. While it is true that the nominal price of oil is at record levels, the real prices or the inflation adjusted prices of oil is still far from what it was in 1980 at over $90 per barrel.

The chart above courtesy of chartoftheday.com shows you the movement of the price of oil since 1970. It can be noted that recessions in the US have almost consistently followed oil price spikes.

I find it real strange to find people still in steep denial about the dynamics of rising oil prices. In fact, alot of commentaries I heard lately attribute the current prices spikes to either geopolitical events or speculation. Like any other financial assets, as I have explained several times since 2003, the oil price dynamics is a function of CYCLES. Simply, as the chart above shows, oil has completed a full cycle in about 30 years and is at the seminal phase of the new cycle, which I think resembles the 1970-1975 period.

However, relative to the price spikes of the 70’s which were primarily ‘event driven’ or OPEC instigated supply shocks, today’s spiraling prices are basically structurally driven; incremental demand arising from the industrialization of China and the rising standards of living around Asia, which equates to more energy usage of consumer durables such as airconditioners, motor vehicles and others.

To quote Dr. Marc Faber, ``In fact, if we look at what happened to per capita oil consumption during phases of industrialization in the US between 1900 and 1970, we see that per capita consumption rose from one barrel per year to around 28 barrels. In the case of Japan's industrialization between 1950 and 1970 and South-Korea's between 1965 and 1990, per capita oil consumption rose from one barrel to 17 barrels.

``In the case of China, oil demand per capita is still only 1.7 barrels per year, and for India it has only reached 0.7 barrels. By comparison Mexico consumes annually about 7 barrels of oil per capita and the entire Latin American continent around 4.5 barrels.

``Therefore, starting from such a low base, oil consumption in Asia will, in my opinion, double in the next ten to 15 years from currently 20 million barrels per day to around 40 million barrels per day.”

Chart above courtesy of CNN.com

More demand than supply= spiraling oil prices

Further, years of underinvestment due to depressed oil prices and nationalization of oil companies led to the miscalculation of global demand and investment misallocation leading to today’s ‘out-of-whack’ imbalances.

For example, no gasoline refineries where built after 1976 in the US, such that with oil refineries operating at 95%, wear and tear has resulted to 14 disruptions in US refineries since July 20^th according to Bloomberg which prompted gasoline prices to shoot past $2, particularly $2.0048 a gallon after hitting an intraday record high of $2.0145.

In addition, there has been no major oil field or ‘elephants’ discovery in 35 years. I recall an anonymous analyst at Bloomberg who cited that for every 5 barrels the world consumes only 1 barrel is found as replacement.

An even grimmer outlook is that of the “Peak Oil” theory, where the celebrated late Shell geologist Dr. M. King Hubbert predicted that US oil supplies reached its zenith in 1970, who was initially dismissed and ridiculed by the public, which turned out to be uncannily accurate.

Chart courtesy of hubbertpeak.com

Today, peak oil advocates forecast, using the same methodology of Dr. Hubbert, that an oil crisis looms as global oil supplies are peaking coincidental to the present time when demand growth for fossil fuel is accelerating!

Matthew R. Simmons, president of Simmons and Company International, a specialized energy investment banking firm, contends that ``Saudi Arabia's oil fields now are in decline, that the country will not be able to satisfy the world's thirst for oil in coming years and that its capacity will not climb much higher than its current capacity of 10mbd. Considering the growth in demand, this could easily spark a global energy crisis.” writes iargs.org. Care for a $182 bbl oil as Mr. Simmons predicts?

In other words, even if the peak oil advocates are only partially right, it means that the AGE of CHEAP oil is finally over.

Because price is a function of demand and supply, prices determine where allocation would be and would affect fundamentally the lifestyle of people. I recall then in the early 70’s where our family’s car was an 8-cylinder Chevrolet Impala which eventually was replaced by a smaller Toyota Corolla in the early 80’s. Looking at the 30 year chart, I understand now WHY my dad’s decision to the shift the make our car then.

Using the same analogy and premise, I have argued that cheap oil prices begot the current fad of SUVs, not to mention the availability of cheap credit. Do you share the view that SUVs will still be a fad if gasoline prices hit $4-5 per gallon in the US? I don’t. Whereas oil and energy prices continue to scale new heights, the likelihood for new modes of vehicles possibly alternative fuel adjustable engines like Brazil’s ‘flexi-cars’ or much fuel efficient less energy consuming vehicles to be in vogue in the future.

Finally, it is interesting to note that for the week not only crude oil and gasoline was in record territory but also heating oil and natural gas at a 4 year high. Copper prices soared to fresh record levels anew with Gold nearing its 16-year high.

Could the Philippine Peso Be Part of the Yuan Basket?

Could the Philippine Peso Be Part of the Yuan Basket?

China unexpectedly revealed a parcel of its currency configuration last week to announce that the US dollar, the Euro€, Japanese Yen¥ and the South Korean won taking up the largest share of the modified basket since it reformed its currency construct last July 21^st from entirely a US-dollar peg.

It also disclosed that other countries with significant trade relationship with China were also incorporated to its ‘managed float regime’ such as Singapore, UK, Malaysia, Russia, Australia, Canada and Thailand and hinted that currencies of more countries could be included provided that such countries, to quote People’s Bank of China Governor Zhou Xiaochuan speech, ``has a prominent exposure in terms of foreign trade, external debt (interest repayment) and foreign direct investment (dividend).” The revered Governor Xiaochuan explicitly added, ``Generally speaking, annual bilateral trade volume in excess of US$10 billion is not negligible in weight assignment, whereas that exceeding US$5 billion should also be considered as a significant factor in currency weight deliberation.”

It struck me to note that the Philippine bilateral trade with China has reached the level of `` not negligible in weight assignment” to quote the China’s People Daily Online, ``According to Chinese statistics, the trade volume between China and the Philippines soared to 9.4 billion US dollars in 2003, up 78.7 percent year-on-year. The 10 billion-dollar target for 2005 is likely to be exceeded as trade volume is expected to hit 13 billion dollars by the end of 2004, and the leaders of the two countries have set a target of 20 billion US dollars for the next five years during Philippine President Gloria Macapagal-Arroyo's state visit to China early September.”

According to the Philippine Embassy in Beijing whose chart above I included, ``In 2004, bilateral trade volume reached US$13.33 billion, representing a growth rate of 41.8 percent over the figure of US$9.4 billion in 2003. In the past five years, bilateral trade volume grew at a healthy annual average of 43.78 per cent, with the Philippines gradually selling more to China than it buys from China.”

It appears that China’s thrust is to veer away from exclusively utilizing the US dollar, which it considers as “unstable”, as a medium of exchange for its trading transactions with other countries as can be gleaned from the statement of the Governor, ``When you look at currencies used in trade settlement, although some countries and regions prefer US dollar as the currency for trade settlement with China, this situation is changing gradually and trade settlement in local currencies are increasingly the choice of trading partners…it can better reflect the competitiveness of RMB against major currencies, better absorb the impact generated by an unstable US dollar.” (emphasis mine) The statement could also imply that China is promoting its currency as an alternative to the US dollar!

Going back to the Philippine Peso, as per the defined parameter of the PBoC’s governor, the volume of trade which is in the excess of the $10 billion threshold level qualifies the Philippines as a peripheral currency to China’s basket, and most importantly, with conspicuous joint efforts to expand bilateral trading relationship to about US$20 billion to US$30 billion in the next 5 years! To quote, the Joint Statement of the Philippines and China following the state visit of Chinese President Hu Jintao (April 28, 2005) ``The two sides should give full play to the existing economic cooperation and trade mechanisms, tap into their economic complementarity and potential for cooperation, broaden and diversify trade structure, further expand trade and investment and make efforts to raise bilateral trade to over USD 30 billion within the next 5 years.”

This means that China would be a prominent buyer of the Philippine Peso, despite the ongoing domestic political mess!!! An expanding trade relationship with China should translate to even more buying of China into the Peso to account for weighting adjustments for its currency basket!

Remember, what is SMALL for China is essentially BIG for the Philippines. Based on Asian Development data in 2003 China’s GDP based on current prices is US$ 1.443196 trillion while the Philippines is $78.25 billion which is equivalent to only a meager 5% of China’s. In addition, Money supply represented by M2 for China is at US$2,731.83 billion in 2003 compared to the Philippines’ US$30,906 million or about only 1.1% of China’s. Even if the Peso represents a negligible share in its currency universe, the Peso volume required to fill its share would be immense on Philippine standards.

If I am right about the Peso’s inclusion to the China’s basket, then fundamentally China sets the floor price of the Peso! You can just imagine China’s growing economic clout or influence to the Philippines which eventually should gradate to the political sphere too.

Caveat for the Peso bears!

JETRO and KWR International: Asia is the best bet for business

Because of the political hullabaloo, countless commentaries focusing on the hapless state of the country have been floating around.

There are two ways to actually to view the country; for a pessimist one needs to only look at the insulated bleak state of the Philippine government, for the optimist, one only needs to look outward and seek its prospects.

However, there are catalytic underlying developments around the world today that have dominated economic realities such as the increasing trend of seamless barrier interactions which has its own ripple effects such as increased trade, global capital flows, deepening of the financial markets, outshoring/outsourcing phenomenon among others … As Japan’s Jetro and KWR International writes in the Asia Times….

``Despite the political, social, economic, demographic and other challenges that exist in Asia and Japan itself, it is clear the region represents an increasingly attractive and important component of global markets, which internationally focused corporations and investors neglect at their own risk. Those who focus solely on the risks will surely miss out on the many opportunities for enrichment afforded by Asia's large population, its ongoing industrialization and urbanization, and its increasingly affluent middle class.”

To read on the entire article simply click on this link:
http://www.atimes.com/atimes/Japan/GH02Dh01.html

From the World Bank Press: "Commentary: Lifting Trade Barriers Will Help Poor"

To give us an idea on how to alleviate poverty in the Least Developed Countries (LDCs) that have lagged behind the emerging market growth stories, a commentary from the World Bank press penned by Hafiz A. Pasha, Assistant Secretary-General of the United Nations and Regional Director for Asia and the Pacific should be able to help enlighten us over what are truly behind scenes…

From the World Bank Press: "Commentary: Lifting Trade Barriers Will Help Poor"

In a commentary published in The Jakarta Post, (Indonesia), Hafiz A. Pasha, Assistant Secretary-General of the United Nations and Regional Director for Asia and the Pacific of the United Nations Development Program (UNDP), writes that as high-ranking representatives from 53 Asia-Pacific countries gather in Jakarta on Wednesday to review progress toward the Millennium Development Goals (MDGs), ambitions of reducing poverty cannot be achieved without the opening up of international trade.

Nowhere is this more necessary than in the Asia pacific region, where the widespread extreme poverty of the 14 Least Developed Countries, or LDCs, is masked by a "tyranny of averages" that focuses on the rising prosperity of China, India and the East Asian "tigers." In the region's poorest countries, however -- a group that includes Timor-Leste, Afghanistan and Nepal -- almost half the overall population lives below national poverty lines, and their potential for reaching the eight MDGs by 2015 is seriously compromised.

To meet the Goals, ensuring that the poorest countries have something to sell -- and enjoy better market access -- must be an integral part of an enhanced global partnership for development. These countries, which comprise about 40 percent of the global population in LDCs, compete with a distinct disadvantage: In the textiles and clothing export sector, for example, the average tariffs faced by Asia-Pacific LDCs are higher than those by their counterparts, often outweighing the bilateral aid they receive. Likewise, market access preferences have been less favorable for Asia-Pacific LDCs than for comparable countries in other regions. A particular area in which labor-abundant Asia-Pacific LDCs need wider market access is for their overseas workers, especially those at the lower end, with low skills. Like countries in Africa and the Caribbean, Asia-Pacific LDCs also must benefit from preferential trade schemes comparable to the Cotonou Agreement of the European Union.

The LDCs themselves have spoken on this, notes Pasha. Necessary policy actions recommended by the LDCs and endorsed by the United Nations Special Body on Least Developed and Landlocked Developing Countries are highlighted in a report being launched regionally Wednesday at the Ministerial-level meeting. To ensure the success of the global partnership, national policies must focus on mainstreaming trade into overall development plans and the poorest countries must carefully examine the social impact of various trade liberalization options. Developing countries of the region need to re-examine their own structure of protection, which often has weighed most heavily on exporters from the LDCs. And industrialized countries must ensure policy coherence to avoid negative social effects on the "losers" of trade, such as displaced female workers, or real wage decreases, which risk pushing people into deeper poverty.

Without action, achieving poverty reduction among Asia-Pacific's poorest countries will be daunting indeed. But if we strengthen the political will, we can shore up perhaps the best sources of future trade and investment growth in the world's fastest-growing economic region – and future dynamism for the global economy, Pasha concludes.

World Bank Press: Unending Graft Is Threatening Latin America

Filipinos think that their country is headed for perdition due to excessive politics rooted on Corruption, well the article below by the World Bank press reveals that WE ARE NOT ALONE! Developments in Latin America shows of exactly similar defects, and most importantly many countries have emerged from dictatorship/authoritarian governments to fledging democracies, only to find no substantial improvements…yet ironically a lot of the folks at home have been silently clamoring for a return to authoritarian forms of government, we never learn…

World Bank Press: Unending Graft Is Threatening Latin America

As he campaigned for the presidency in 2002, Luiz Inacio Lula da Silva boldly pledged to clean up the sordid politics of Brazil, writes The New York Times (07/30). But now, in a gloomy echo of what has happened time and again across Latin America, da Silva's government is mired in the biggest, most audacious corruption scandal in his country's history.

Brazil's scandal is just the latest reminder of the unremitting corruption that has marked Latin American politics since colonial times, when absolute rulers regarded newly conquered realms in the New World as their personal property. The important difference today is that popularly elected governments now hold sway, and corruption has emerged as one of the gravest threats to the hard-won democratic gains of the last 20 years. Across the region, these second-generation democrats have proved a disappointment, and their ineffectiveness and low standing have allowed political instability and economic disparity to grow. Opinion polls routinely cite corruption as a top cause for a dangerous disillusionment sweeping the region. The disaffection has led to violent popular outbursts, including the lynching of public officials in Peru, and has helped force out eight heads of state in five years.

Some point to the flourishing of cases as evidence that judicial systems and governments are finally taking bad leaders to task. But many analysts and citizens regard the persistence of patronage, nepotism and bribery as a telling measure of the low quality of the region's democracies and of how little elite attitudes have changed since the time when colonial overlords ruled for the purposes of extraction and enrichment with little regard for the people beneath them. International groups like the World Bank say official graft and nepotism are so powerful that they are rotting government institutions and stunting economic growth. In recent Congressional testimony in Washington, American officials estimated that official corruption might shave as much as 15 percent off annual growth in Latin America, as public funds are pilfered and wary foreign investors shy away.

Latin Americans regard corruption as their most serious problem after the region's economic crisis, according to a survey of 18 countries taken in 2004 by Latinobarometro, a Chilean public opinion firm that regularly conducts surveys around the continent. Eighty percent of respondents have also consistently said that they perceive that corruption has increased, while other surveys show that in some Latin American countries, like Argentina, people believe that corruption has a significant effect on the ways business and politics are carried out. ''The impact of corruption on our economies is huge, just huge,'' said Jose Ugaz, a Peruvian who investigates corruption for the World Bank. ''Then there are other effects that cannot be easily measured -- people not having confidence in their governments, thinking officials are stealing money.'' ''When the people lose confidence in the people governing the country,'' he added, ''immediately the loss of confidence generates a lot of problems, and one of them is unrest.''

Frustration has reached dangerous levels in several countries, with sometimes violent street protests. The shift from authoritarian governments to democracies, many had hoped, would squelch the kind of corruption that predominated when dictators ran the affairs of state. Yet successor governments across the political spectrum have proved even more susceptible. With once-closed economies having been opened up and corporate profits at record levels, the opportunities for graft and bribes are larger than ever. Despite improved economic indicators, the ranks of the poor have continued to swell, as has the resentment of those who are pocketing the wealth of the nation for their own benefit.

While some states have markedly improved, notably Chile and Uruguay, they are the exceptions, and the envy of their neighbors, write the New York Times. Venezuela, Paraguay and Bolivia have all had increases in corruption or have shown practically no improvement in fighting it, an annual survey by the corruption watchdog Transparency International shows.

Corruption shows itself in many ways, but perhaps its most glaring and grating form is nepotism and patronage, the flaunting of political connections that so alienates ordinary people. Those practices also take many forms, from outright bribes to jobs and contracts awarded to unqualified or inexperienced people who happen to be related to those in power. Perhaps most ominous for the region's democratic health is that recent scandals involve corruption not simply for personal enrichment, but also to obtain and hold onto power indefinitely, threatening democratic institutions themselves. Yet the leaders involved have denied wrongdoing and have been loath to accept any responsibility, the US daily argues.

August 1, 2005 Aussies Know Something That We Don’t?

Aussies Know Something That We Don’t?

The price chart below belongs to Nido Petroleum, an oil exploration company whose core operations are in the Philippines, particularly the Nido, Masinloc and Galoc oil wells and lately in North Sea, UK.

The company has a significant interest in the said fields. With the farm-in agreements concluded with its Philippine partners, the consortium is ready to develop the oil Galoc field which has estimated reserves of about 50 million barrels.

While it has secured a license to explore on North Sea UK, it appears that the core operations will presently come from the Philippines.

Nido Petroleum Chart Courtesy of netquote.com.au

So why has Aussie investors bid up on Nido? Does this represent a ‘writing on the wall’ for Philippine oil stocks?

Further, in yesterday’s classified ads we observe that Philodrill Corporation published a TENDER FOR BIDS for tankers which would service the oil lifted from the Nido platform terminal starting January of 2006. This means that Philippine Oil exploration companies would start to generate revenues from the current wells, hence the possible reason behind the build up of accumulation activities in the domestic market.

Philippine Oil Index Breakout!

Consortium Members: OV, OPM, APM, BSC and PERC

DrKW Global Equity Strategist James Montier: Doing the right thing or the psychology of ethics

This insightful excerpt taken from fullermoney.com by DrKW’s (Dresdner Kleinwort Wasserstein) Global Equity Strategist James Montier: “Doing the right thing or the psychology of ethics” tackles on our thought process and how we usually pass on ‘Moral' or 'Ethical' Judgments to ‘everyday’ issues be it finance, investing, politics or to any our precious life’s little daily encounters...

We all believe we behave in an ethical fashion. Unfortunately the evidence suggests this is just another in the long list of positive illusions we lumber under. Our moral judgements are often not the result of reflective logical thinking, instead they are driven by unconscious emotions. Being aware of our own implicit biases is an important step along the road to learning to be mindful about ethics.

We all tend to suffer from an ethical blindspot. We have a good idea about how others will act in moral situations, but we are hopelessly optimistic about our own behaviour. We tend to think we will behave much better than we actually do. We also think we will be uninfluenced by biases or conflicts of interest - the illusion of objectivity. Sadly the reality of our behaviour is very different.

Historically, moral judgement has been held to be the result of logic. Ethical dilemmas are meant to be resolved by a process of reflective logic. However, recent evidence suggests that more often than not our moral judgements are made on the spur of the moment by emotion. Moral reasoning is often a post hoc justification for the decision we made, rather than a balanced review of the relevant information before we reach a conclusion.

Bazerman et al have referred to our behaviour as bounded ethicality (as a parallel to the bounded rationality of judgement and decision-making). Just as bounded rationality consists of a well-defined group of common biases and errors in thinking, so bounded ethicality covers some generalised traits of unethical behaviour.

Four key ethical biases have been identified.

Firstly, we have a tendency towards implicit attitudes or unconscious prejudices. We tend to think of ourselves as free from biases such as racism or sexism. However, implicit attitude tests reveal that whilst we think we are unbiased, many of us actually display stereotypical thinking.

Secondly, we tend to display in-group bias - a tendency to favour those who are like us. For instance Van Knippenberg et al created a mock crime, giving jurors information about the crime and witness statements. When they were placed under high cognitive strain, they fell back on stereotypes. When told the suspect was a banker only 44% of jurors said he was guilty, when told the suspect was a drug addict 80% of jurors said he was guilty.

Thirdly, we all tend to over-claim credit. If you ask spouses to estimate their contribution to household chores, the sum is almost certainly greater than 100%. Similar findings hold for most groups.

Finally, we underestimate the impact that conflicts of interest will have upon us. Experiments reveal that we fail to correct for the degree of influence that conflicts will have on our decisions. For instance, Professional auditors were 31% more likely to accept dubious accounting if they worked for the company rather than an outside investor! Becoming mindful of our proneness to ethical failure is perhaps the only way of dealing with insidious bias. Legislation and disclosure simply won't work.

Yuan’s Dollar Unpegging Opens Portals for Philippine Economic Advancement

Yuan’s Dollar Unpegging Opens Portals for Philippine Economic Advancement

A kaleidoscope of earthshaking global events has failed to take away the limelight from the unwarranted fixation of Filipinos on domestic politics. The terror bombings in Egypt, whose causalities have climbed to 88 fatalities as of this writing and the second series of bombings in London and most importantly, the seismic ‘Yuan revaluation’ or the depegging of the Chinese currency from the US dollar for the first time in more than a decade which is now the du jour topic of the global financial markets.

While the Yuan’s peg has been adjusted by only 2.1% from 8.3 to 8.11 to a US dollar, the move towards a “managed exchange rate regime” alters the framework of its peg from the US dollar to a “basket of currencies” which almost similar to the Singapore dollar model. Second, the currency is now allowed to float within a trading band of +/- .3 percent, with the closing prices determined at the end of the trading day.

What is so significant about the Yuan? According to Morgan Stanley Chief Economist Stephen Roach ``China’s fate is tied far too closely to that of the US. Its export-led growth is dependent on the American consumer; at least a third of all Chinese exports go to the US. Moreover, China’s currency, the renminbi, has been pegged to the US dollar for over a decade. This means the monetary policies of the People’s Bank of China and the Federal Reserve are joined at the hip.” Moreover, according to Andy Xie Asian analyst also for Morgan Stanley ``China has become the biggest trading partner for most East Asian economies, and it has substantially increased its influence in the region.”

In other words, in the context of global trade dynamics, the symbiotic relationship of China, as the world’s principal supply chain, and the United States, as the world’s premier consumer, has been implicitly shaped by an interlocked monetary policy as evidenced by the Yuan/Remimbi peg to the US Dollar. This implies that with the current move to wean away from its interdependence to the US dollar, China is finally adopting an independent monetary policy! In this instance, the central banking skills of the People’s Bank of China (PBOC), China’s central bank, will finally be tested and most importantly, we could probably be at the cusp of a major global structural trade, financial and economic adjustment that essentially would be deal with the extant imbalances that threatens the global economy.

It is true that while the revaluation is miniscule relative to the expected adjustments (anywhere from 15 to 30%), the PBOC is anticipated to adopt ‘baby steps’ in its transition to the new exchange regime, possibly to avoid the risks of having massive disruptions or dislocations in the financial markets that may ripple to the global economy. Further, it is my view that the gradual steps are part of the Chinese central bankers’ learning or experience curve as quasi-independent policy makers.

It is also possible that the recent moves to adjust its currency could be a political statement in response to the souring relationship with Washington as threats of legislated protectionism, particularly the Schumer-Graham China Currency Act (S. 295) which would slap 27.5% tariffs on Chinese imports, are poised to undermine global trade flows. China needs those jobs badly as rising unemployment or displaced workers from former state owned enterprises could stir political instability that may overwhelm the Communist ruling party’s survival (Sounds familiar?).

What’s in it for the financial markets? For one, the diversification away from the US dollar and the pegging to a basket of currencies are definitely bearish indicators for the US dollar and US treasuries.

		2004
	Country	in $ Million
1	United States	169,626.20
2	Japan	167,886.40
3	Hong Kong	112,678.40
4	South Korea	90,068.20
5	Taiwan	78,323.80
6	Germany	54,124.30
7	Singapore	26,683.90
8	Malaysia	26,261.10
9	Netherlands	21,488.60
10	Russia	21,232.00

Table courtesy of USChina.org

If there would be any clue to the inscrutable ‘basket of currencies’ peg recently adopted by the PBOC, the above table shows of China’s top 10 largest trade partners, which posits that the US $ and Japan ¥ would get a bigger share of the basket pie while Asian Currencies may dominate the basket.

As the Yuan appreciates the cost of imports from China are likely to expand thereby increasing headline inflation pressures in the US. Further, the new Yuan peg construct essentially diminishes China’s need to recycle its trade surpluses to US treasuries, and as well, may raise the odds for a shift out of the US dollar. This in effect removes the artificial bid to the US dollar denominated assets which has, thus far, provided subsidy to the low interest regime in the US today. The lifting of the subsidy would translate to probable cutbacks on US treasury purchases that may lead to falling bond prices or higher yields suggestive of higher interest rate environment which may test the resiliency of the asset-dependent heavily indebted US consumers. Malaysia’s lifting of its ringgit-US dollar peg, just hours after China’s promulgation, may yet underscore this.

For China, the 2.1% revaluation is less likely to affect their economy, since the wage and cost differentials are only a fraction relative to US standards.

Second, after applying administration policies to unsuccessfully slowdown growth to lower the risks of overheating, the revaluation could have been also used as an instrument to temper the fast clip growth momentum as well as to reduce inflation. China’s GDP accelerated to 9.5% in the second quarter, ``spurred by a $39.6 billion trade surplus, rising consumer spending and investment in power plants, mines and factories. The faster-than- expected growth suggests Asia's second-largest economy can withstand a stronger currency, which will make the nation's exports more expensive overseas.” observes Bloomberg’s James Regan.

Further, the tensions arising from its inability to sterilize excess money in buying US dollars in its monetary system may have the heightened risks of excess credit creation as manifested by the emergence of ‘assets bubbles’ and mounting inflation. The revaluation basically gives China an ample room to exercise monetary tools for flexibility purposes.

Third, China’s government has taken steps to increase outflow of capitals prior to the recent revaluation. This is clearly visible with China’s encouragement of its endogenous companies to invest overseas such as Lenovo’s latest acquisition of an IBM division, Haier’s (China’s largest home manufacturer) bid for Maytag (the struggling maker of Hoover vacuums), and the controversial China’s CNOOC (China National Offshore Oil Corp.) tender for Unocal.

The other related notable capital outflow policies are the raising of the limits on the amount of money that students and tourists can bring abroad, as well as the current process of loosening restrictions and repatriation of money for foreign owned companies in China. This implies that China intends to use much of its foreign currency reserves to support its financial sector, secure energy and raw materials, and to expand overseas through acquisitions for brand expansion, distribution channels or showcase their management skills.

Lastly, given the present economic realities such as the surplus capacities brought about by excess business and government investments, rising costs in the coastal areas, transportation bottlenecks, shortage of oil and electricity, China’s present thrusts, according to Simon Hunt of Simon Hunt Strategic Services as excerpted by John Maudlin seems to revolve around ‘focusing on business profitability’, ‘return on capital investment’, ‘value added’ ventures (new technology, more expenditures on R&D and etc.), and expanding inland or rural sectors ``where transport systems have improved, where land costs are a fraction of that in the coastal cities and where wages are one-third or less.” These disadvantages open the doors for opportunities among the region’s low cost producers and other emerging market economies.

Naturally, an appreciating Yuan would translate to more expensive exports for China while reducing import costs that may yet stimulate its domestic demand.

For manufacturing companies in South Korea, Japan and Taiwan, capital investments may shift to lower cost production countries such as Vietnam, India or other emerging economies. Yet if domestic consumption will be augmented by the China’s currency appreciation then regional trading opportunities will undoubtedly accelerate. Further, the trend suggests (as can be seen by China’s table of top trading partners above) that inter-regional ties would likely deepen as trade and investments expand.

For a region that holds about 60% of the world’s population supported by 70% of the global currency reserves, it is of no doubt why our paragon benevolent dictator Mr. Lee Kuan Yew, Singapore’s former Prime Minister in his latest article ‘Rising Asia’ in Forbes forecasts that ``The inevitable surprises will occur, but both China and India are on course for a revival of their glorious civilizations. By 2050 the world's economic center of gravity will move from the Atlantic to the Pacific and Indian oceans.”

Meanwhile, the US is unlikely to recover the hollowed out manufacturing capacities it has lost to the outsourcing/offshoring phenomenon given that its relative price structure is still way above China and the emerging market economies even considering a 30% revaluation of the Chinese currency.

Japan Yen Spot Rates 1989-2004

If history could be a gauge then Japan’s remarkable appreciation from about 150 yen (USD/JPY) in 1998 until 110 today for a 26% rise has not stanched the tide of surpluses in favor of Japan, as shown in the chart above, courtesy of Gavekal Notebooks, “Japanese equities will do a lot better than the economy”. Japan’s foreign currency reserves is the world’s largest for the 67^th straight month for June, according to Forbes at US$843 billion and is the largest US Treasury holder at $687.5 billion (May 2005) according US Treasury Department!

To aptly quote Dr. Faber, ``Quite frankly I do not understand the thinking of central bankers. Either they think that a strong currency is a problem or they think that weak currency is a problem. The world would be better off if central bankers collectively resigned and let the market fix exchange rates. Then there would never be a problem, in my opinion. In addition, a strong currency has never been a problem in the long run. It forces corporations to become extremely efficient, to innovate and to invent new methods of production. Weak currencies on the other hand are an incentive to compete based on short term favourable exchange rate movements – in nature very much alike protectionist economic policies. I think the Yen could appreciate to one US$ equal 1 Yen and the Japanese would still have a trade surplus with the US.”

Finally, the Yuan revaluation essentially opens the economic opportunity portals for emerging market economies as the Philippines to take advantage of. While most of us Filipinos are still trapped in the arguments of personality based politics and instant gratification solutions to our economic and financial problems, here we are faced with opportunities to recover our senses, wits and dignity. Simply put, here is the opportunity, what do you do?

``Count your blessings. Once you realize how valuable you are and how much you have going for you, the smiles will return, the sun will break out, the music will play, and you will finally be able to move forward the life that God intended for you with grace, strength, courage, and confidence." Og Mandino, American Essayist and Phychologist, 1923-1996

Llewellyn H. Rockwell, Jr.:What We Mean by Decentralization

Decentralization is an important step to where Philippine democracy can be strengthened given its intrinsic diversity. This insightful article by Mr. Lew Rockwell, of the Ludwig Von Mises Institute enunciates why it has worked even on the private organizational level. Quoting the entire article…

What We Mean by Decentralization

by Llewellyn H. Rockwell, Jr.

The Kelo decision, in which the Supreme Court refused to intervene in the case of a local government taking of private property, touched off a huge debate among libertarians on the question of decentralization. The most common perspective was that the decision was a disaster because it gave permission to local governments to steal land. Libertarians are against stealing land, and so therefore must oppose the court decision.

And yet stealing isn't the only thing libertarians are against. We are also opposed to top-down political control over wide geographic regions, even when they are instituted in the name of liberty.

Hence it would be no victory for your liberty if, for example, the Chinese government assumed jurisdiction over your downtown streets in order to liberate them from zoning ordinances. Zoning violates property rights, but imperialism violates the right of a people to govern themselves. These Chinese government lacks both jurisdiction and moral standing to intervene. What goes for the Chinese government goes for any distant government that presumes control over government closer to home.

How is the libertarian to choose when there is a conflict between the demands of liberty and strictures against empire? The answer is not always easy, but experience and the whole intellectual history of liberalism suggest that decentralized government is most compatible with long-run concerns for liberty. This is why all the founders were attached to the idea of federalism: that the states within the union were the primary governing units, and the Bill of Rights was to protect both individuals and the states from impositions by the central government—even when liberty is invoked as a justification.

Just so that we are clear on this last point: the purpose of the Bill of Rights was to state very clearly and plainly what the Federal Government may not do. That's why they were attached to the Constitution. The states, under the influence of skeptics of the Constitution's limits on the central power, insisted that the restrictions on the government be spelled out. The Bill of Rights did not provide a mandate for what the Federal Government may do. You can argue all you want about the 14^th amendment and its equal protection clause by a reading that says it magically transforms the whole Bill of Rights to mean the exact opposite of its original intent is pure fantasy.

Back to the libertarian presumption in favor of decentralization. There are several reasons for it.

First, under decentralization, jurisdictions must compete for residents and capital, which provides some incentive for greater degrees of freedom, if only because local despotism is neither popular nor productive. If despots insist on ruling anyway, people and capital will find a way to leave. If there is only one will and one actor, you cannot escape.

Second, localism internalizes corruption so that it can be more easily spotted and uprooted. Along the same lines, local government corruption can be rather benign by comparison; it is easier, on a middle-class budget, to pay off the zoning board than to bribe the State Department.

Third, tyranny on the local level minimizes damage to the same extent that macro-tyranny maximizes it. If Hitler had ruled only Berlin, Stalin only Moscow, and FDR only Washington, the effects of their demented policies might have been contained. This is not only a utilitarian consideration. It means that evil people are prevented from violating the rights of people outside their jurisdiction.

Fourth, no government can be trusted to use the power to intervene wisely. With such power, central governments will always invoke good motives even when they are a mere mask for power grabs (as when the US invaded Iraq, for example). The typical path goes this way. An intervention takes place that might be celebrated by good liberals, such as the Lochner decision (1905) by the Supreme Court that invalidated New York's labor regulations. But once that power is gained, it is used to put a legal imprimatur on central planning and prevent local governments from finding an escape (the central planning of World War I was Lochner's daughter).

Fifth, a plurality of governmental forms—a "vertical separation of powers," to use Stephan Kinsella's phrase—prevents the central government from accumulating power. Lower governments are rightly jealous of their jurisdiction, and resist. This is to the good. In fact, the whole history of liberty is bound up with the glorious results of competing institutional structures, no one of which can be trusted with complete control.

To be sure, this does not mean that libertarians must be agnostic on the question of what government should look like. Law should protect person and property against invasive force. This principle applies in all times and in all places. But that does not mean that there must be a single law giver and enforcer. To maximize the chance that good law will prevail over bad, over the long haul, and prevent power grabs from the top, we need a multiplicity of legal forms.

Murray N. Rothbard had a nice phrase that he used to summarize this position: universal rights, locally enforced. Those two principles are frequently in tension. But if you give up one of the these two principles you risk giving up liberty. Both are important. Neither should prevail over the other. A local government that violates rights is intolerable. A central government that rules in the name of universal rights is similarly intolerable. Heaven on earth is universal rights, locally enforced. No, it's not here yet. That's why libertarians exist, to work for the ideal.

Now, there is another form of decentralization you often hear about. It comes from those who regret globalization in all forms, including multinational corporations and the like. They complain about the centralization of life in the modern age and long for simpler times. Here's the problem: the kind of centralization they regret is a result of voluntary decision-making in the marketplace. It is freely chosen centralization. Their plans for scaling back would requires massive coercion and bring about an economic calamity.

In matters of private association and market economics, libertarians can make no a priori decision concerning the best means to organize. Rothbard was a defender of multinational corporations and global trade, but he also saw that too much integration in the production structure is bad for business. Firms loose the ability to calculate their profits and losses when they are responsible for too great a degree of internal production for their own capital goods.

How does this impact the organization of other institutions in society, like church, extended family, civic associations, and ideological movements? Is centralization best or is decentralization best? The answer must be left to experience. The Catholic Church is centralized doctrinally but decentralized managerially. The family in the American context is not centralized between generations. Grandparents are there to dote, not rule. Civic associations take many forms, from national organizations to local ones.

Rothbard himself, in the course of experience, changed his view on the best method for organizing ideological movements. Early on, he was attracted to the idea of top-down management, with cadres and followers and cells of every sort. He saw that this worked for the Communists, so why not for the libertarians? He was right to say that nothing in libertarian theory prohibits top-down management insofar as it is voluntary and rooted in private property.

But later on in life, he changed his mind and wrote that he found serious problems with this model, and they are related to the same problems that appear with political centralization. In the Libertarian Forum, August 1981, he writes:

"I would like to take this opportunity to admit my previous error in calling for an ultra-centralist model for the [Libertarian Party]. Several years in the [LP] have soured me on centralism permanently. Putting the rule of the Party, or of the movement as a whole, into the hands of one man or of one tight group is a recipe for disaster. First, it means that if a few people sell out to opportunism, the rest of the movement is dragged along with it. But second, and more generally, even if the Machiners were a bunch of wonderful people, since they are not omniscient they are bound, as are all of us to make mistakes. And just as the mistakes of a government controlled economy can ruin a nation, so the inevitable mistakes of a tight ruling clique can ruin a party or a movement. I still think it absurd to think of decentralism as 'the libertarian' form of organization. How we organize is not a matter of libertarian principle, so long as we do not violate the non-aggression axiom. But it appears that neither radical decentralism nor ultra-centralism will work in any organization…. [M]oderation and balance should be our organizational mode."

How right he is! Imagine if the only forms of ideology available to us were those offered by Washington, D.C. organizations, with their hyper-policy focus and tendency to kowtow to the state. In intellectual life, we need a vast multiplicity of forms in order to check corruption and compromise. Even in the libertarian movement, we need diversity and experimentation, not centralization, command, and control.

In the organization of business, ideas, and life itself, Rothbard recommends balance and moderation. So we might articulate two Rothbardian principles. In public affairs, we need universal rights, locally enforced. In private and economic affairs, we need neither centralization nor decentralization, but moderation and balance, trial and error. To me, these formulations represent the height of good thinking, good law, and the good society.
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Llewellyn H. Rockwell, Jr. (Rockwell@mises.org) is president of the Ludwig von Mises Institute in Auburn, Alabama, and editor of LewRockwell.com. See his Mises.org archive. Purchase his book, Speaking of Liberty. Post comments on the blog.